Why use an Employee Benefit Trust?

Employee Benefit Trusts (EBTs) can be a useful part of employee share ownership plans, particularly for privately held companies.  If you’re considering an EBT as part of your employee share scheme, it’s a good idea to understand how they work, what they can be used for – and whether they might be more trouble than they’re worth.

What is an employee Benefit Trust (EBT)?

An EBT is a trust that holds shares (and other assets) on behalf of employees of a company or a group of companies.  Those employees are the “beneficiaries” of the trust.

Most EBTs are discretionary, which means the trustees can use the assets to benefit just some of the beneficiaries.  Some EBTs are limited by additional legislation.  For example, an Employee Ownership Trust (EOT) i.e. often referred to as the John Lewis model of company ownership, and a Share Incentive Plan (SIP) must follow particular rules which mean (broadly) that they must benefit all of the employees on a fair and equal basis.

An EBT is not a share scheme.  But it can hold shares that can be delivered to employees by way of a share scheme.  For example, it is possible for an EBT to hold shares and grant Enterprise Management Incentive or EMI options over the shares to employees. 

How does an EBT work?

The EBT will be operated by its trustees.  The trustees must act in accordance with the documents that establish the trust (typically, a trust deed) and with trust law. 

Commonly, where an EBT is established by a company, the trustees may take direction from the company’s directors in respect of how to deal with the assets in the trust.  So, for example, the directors can suggest to the trustees that they grant options over their shares to employees. 

However, the trustees must remain independent from the company and must make their own decisions.   The most important point for any trustee to remember is that they must always act in the best interests of the beneficiaries. 

What can I use an EBT for?

There are various uses for EBTs, but RM2 only establishes EBTs for private companies if the EBT can help the operation of their bona fide employee share plans. 

Sometimes, this is as part of a scheme where a trust is absolutely required such as the SIP and the EOT.

Otherwise, there are two key reasons why private companies use EBTs.  Firstly, an EBT can be used to “ringfence” a specific percentage of shares for employees – this can help protect other shareholders from dilution.  Secondly, an EBT can act as an internal marketplace for employees to buy and sell shares.  This can be very helpful when an employee shareholder has stopped working for a company and their shares can be bought back to be “recycled” under an existing share scheme. 

What are the pitfalls of an EBT?

EBTs are subject to a raft of complex tax legislation designed to combat tax avoidance and care must be taken that any trust does not inadvertently fall foul of those rules. 

They will also add costs to the running of your share scheme, as you will need to set up the trust, appoint trustees (and, if they are professional trustee, pay them), and provide regular information to HMRC on the trust’s activities including, in most cases, registering the trust.

Is an EBT right for my company?

Whether or not you set up an EBT will depend on your company’s particular circumstances.  We would recommend you consider the design of your employee share plan and your specific requirements before committing to using an EBT.

If you’d like to discuss EBTs in the context of share schemes, please contact us on 0208 99 5522 or email us at enquiries@rm2.co.uk, and one of our advisers will be happy to arrange an initial call with you.